Back to the Future

How much trouble is the market really in, and how much worse can it get? A miraculous trip forward in time offers the uncanny advantage of 20/20 hindsight.

Perhaps we should have known we were still nowhere near the bottom when Fox TV's America's Most Wanted CEOs became a runaway hit. We should have realized there was more to come after Lucent and Nortel and Qwest all filed for bankruptcy in one hellish week. But the decision by Martha Stewart to plead guilty to obstruction of justice in return for 52 weeks of kitchen duty at the Sisters of Charity in Newark clinched it for me: There was plenty more pain ahead. She narrowly avoided sharing a cell with Wendy Gramm, the wife of Phil Gramm, who is now under investigation for her failure to supervise Enron's finances as the most important person on that defunct company's audit committee.

How hard was it to figure that things were really unraveling after New York state attorney general Eliot Spitzer personally placed the handcuffs on "King of all Analysts" Jack Grubman while Jack was being interviewed on CNBC's Squawk Box?

But still, throughout the summer and fall of 2002, despite all the evidence at hand, the Wall Street bulls and mutual-fund managers just kept insisting that the bottom had been reached and the turn was at hand. Yet here we are in November 2002, Dow at 6,000 and NASDAQ at 1,000, with investors still piling out of the market in droves.

The losses continue because after the House went beyond the Senate in toughening penalties for crooked CEOs, the bill was watered down in conference. Republicans, working with Senator Gramm and President Bush, took the teeth out of any reform that would have cleaned up Wall Street -- including the separation of accounting from auditing, which would have cut the pay of the average Big Four accountant in half. As a result, the investor class has simply given up on the markets entirely.

And who can blame Republicans? Business and accounting lobbyists realized early on that if any serious legislation were passed, there wouldn't be enough white-collar jails left to hold all the miscreants. So here we are, just a few weeks after that ugly, ugly day in October, that down-1,000 day that took even my breath away (and I've seen plenty of down days in my twenty-plus years as a trader). It's time to look at how the whole shooting match unraveled so darned fast. Because now we realize, too late, that if you don't react to a crisis quickly and implement fundamental changes, the problems only deepen.

We should have accepted that with all of the corporate chicanery, the government had to step in and legislate some meaningful changes, because in this case, the "free" market obviously couldn't police itself. We should have realized early on that without effective action, the dollar would continue to decline -- a Euro now buys $1.20 -- and we should have recognized that Japanese and European investors would flee en masse. After all, their accounting and market regulations turned out to be much tougher than ours.

But throughout the early part of the decline, during those humid days of summer, we just kept hoping that the administration would side with the reformers and boot Harvey Pitt, the accountants' man on the SEC, and Paul O'Neill, the lackluster Treasury secretary whose peculiar brand of avoidance on the ethics issue contrasted sharply with the straight shooting of his predecessors Bob Rubin and Larry Summers.

Yet, after the bills were gutted -- with lobbyist dollars from accounting and Wall Street trade groups punching too many loopholes into the new laws -- gravity took over and the market was pulled further down by its own dead weight. Americans now view the markets the way they viewed the WWF: Everything's rigged. Consumer confidence -- our last, best hope -- just evaporated, and with it went retail spending. With that gone, there simply weren't any more reasons to stay in equities.

It didn't help, of course, that as summer turned to fall, we got more reports that Al Qaeda had regrouped and moved to Detroit, of all places, where it now functions in the open, totally protected by the First Amendment and the inability of the federal government to wiretap mosques. When the decision by a group of radical clerics from Saudi Arabia to develop the world's largest mosque on vacant land in downtown Detroit was hailed by state and federal authorities as a boon to the beaten-up economy, it showed how the administration, desperate to boost the stock market and the economy, would do anything to create new jobs. And that was after the Washington Post revealed the Saudi group's direct connection to Osama!

The giant runs on mutual funds occurred not long after that, as the much-discussed "401(k) Rebellion" began in earnest. Without any new money coming in, many of these funds had no choice but to sell the market and sell it hard.

The September decision by President Bush to give free prescription drugs to seniors, in order to get the Florida and Pennsylvania vote, destroyed confidence in the budget process, causing foreigners to sell our bonds, which, ironically, forced interest rates up just when business was turning down.

The final straw came last month, when Alan Greenspan retired, and President Bush decided to replace him with Phil Gramm. At his swearing-in ceremony last week, Gramm demanded that Bush pardon his wife for all Enron wrongdoing. It was an awkward moment, but Bush has apparently front-burnered the decision as I write.

Gramm's first public pronouncement as Fed chair was to suggest that individuals put all their Social Security funds in stocks, especially oil and gas equities. The market was already so demoralized, all it could muster was a mere 300-point drop.

Things began looking up the next day, when Bush replaced Tom Ridge with Rudy Giuliani as Director of Homeland Security. But the optimism was short-lived. I should have closed up shop completely the next day when Dick Cheney revealed that he not only sold all of his Halliburton when he joined the White House but was short millions of shares in a "blind" trust. The news was revealed when Cheney was inadvertently caught needling Paul O'Neill -- who neglected to short Alcoa when he left for Washington -- on a live mike at a fund-raiser in Fairfax, Virginia.

Four months ago, I believed that things couldn't be "this bad." I thought that you had to buy the dip and put money to work on a regular basis because the market seemed so darned cheap. It sure was, and it got cheaper every day.

Which is why, even way down here, I'm not sure that you should put money into this market, not when your house represents such a terrific investment, and Macy's and Nordstrom started selling those new mattresses with "bank drawers" hidden inside.

Hey, now, there's something worth investing in.

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James J. Cramer is co-founder of TheStreet. com. At the time of publication, he owned stock in Alcoa. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. E-mail: jjcletters@thestreet.com